Green Bonds: Metrics—Identifying Eligible Green Projects and Reporting

Saturday, December 5, 2015

The Green Bond Principles (GBPs) require clear environmentally sustainable benefits and where feasible, these should be quantified or assessed by issuers. The GRESB Green Bond Guidelines for the Real Estate Sector take this suggestion one step further by recommending use of:

  • Rigorous green building certification systems (e.g. BREEAM, Green Star, LEED) and/or
  • Energy ratings (e.g. ENERGY STAR, EPC, NABERS).

When looking at green bonds that use proceeds for building-related purposes, there is noticeable diversity among issuers:

  • Corporate Real Estate issuers (the “CRE universe”) and
  • Other issuers that use buildings as part of a green bond framework (the “GGB universe”)

Insights from market research

GRESB recently conducted in-house research to assess the property metrics utilized by green bond issuers, and to determine the main trends evident among the two sets of issuers identified above. The research presented below (download the slides here) identifies several interesting trends:

  • Most issuers reference specific building certification schemes and levels. Corporate real estate issuers (CRE) mostly use global building certification schemes, such as LEED and BREEAM, while only a few issuers reference local schemes (Digital Realty Trust incorporated Green Mark, CEEDA, CASBEE). Among non-corporate real estate issuers who channel green bond proceeds to green buildings, global certification schemes are also used, but these GGB issuers typically use a broader set of local building certification schemes, including DGNB in the case of Berlin Hyp;
  • In both the CRE and GGB universes, approximately a quarter of issuers specify a level of energy reduction/improvement, ranging from 15% (Digital Realty Trust) to 40% (Rikshem). Energy efficiency within the GGB universe is often tied to specific benchmarks, for example those established by local/state regulation; 15% reduction against other buildings in a project’s vicinity (ANZ Bank), or 20-30% reduction against state determined benchmark (NRW Bank). Such requirements are more persistent within the frameworks of European issuers;
  • Issuers within the CRE universe are more likely to specify a range of certification levels, for example, from LEED Certified to Platinum (Regency), but that range is (on average) wider than the ranges used within the GGB universe, which references LEED Silver as the lowest level. This finding is unexpected, as it would make intuitive sense for real estate industry representatives to identify a narrower range due their industry expertise. On the other hand, such difference makes sense given there are more project-specific bonds within the GGB universe, while blind pools dominate the CRE universe. Issuers do not want to limit themselves by narrowing their potential eligible green project pool. To date, there is no indication that use of a wider range of certification levels, hinders investors.
  • The type of bond may impact the type of metrics leveraged. Within the CRE universe there are “use of proceeds” bonds only, while the GGB universe encompasses use of proceeds revenue bonds and securitized bonds, as well as use of proceeds bonds.
  • Climate mitigation, in the form of energy efficiency, drives green property bonds, but there are green bond frameworks that also reference “adaptation measures”. Vasakronan is a good example – they emphasize the necessity for building adaptation to cope with estimated climate change effects within the coming 50 years. This trend is likely driven by the impact climate change is expected to have on the real estate sector, as expounded in the stranded assets debate.
  • Both CRE and GGB universes use the same core metrics for annual investor reporting—actual use of proceeds and identifiable list of projects. However, there are some notable differences. Within the CRE universe, reporting the particular certification level for all use of proceeds is more likely (Unibail-Rodemco and Regency), whereas in the GGB universe, there is greater reliance on case studies and special examples of use of proceeds (Berlin Hyp, Ile de France and NRW). Interestingly, an inverse relationship exists between the level of detail provided in a prospectus and that provided in post-issuance, investor reporting.

Insights from working group dialogue

Various GBWG members shared their perspectives on the topic and highlighted main trends regarding use of metrics within the green property bond universe. Some takeaways from this discussion include:

  • The primary certification scheme referenced in an issuer’s green bond framework (usually) represents the most frequently used scheme within the issuer’s portfolio. Alternative schemes are sometimes selected to take into consideration additional stakeholder preferences. The main aim of stating more than one scheme is to avoid double certification, which implies multiple certification fees for the same building;
  • Some issuers (including Vornado) differentiate certification levels by building activity – newly built or retrofit – as a logical means of addressing the sensible restrictions associated with each activity. For example, not every retrofit can achieve LEED Platinum, thus identifying such a high certification level is not always feasible for retrofits, though it may be effective for  new construction;
  • In cases where the issuer decides to include energy reduction as part of its use of proceeds eligibility criteria, the decision to tie such a reduction to a particular certification scheme often depends on the certification practices within the issuer’s current portfolio and regulations posed by local authorities (e.g. Vasakronan). Reporting on overall energy reduction may prove challenging due to the possibility of measurement and benchmarking disparities;
  • Some investors indicated that green bond reporting should contain specific environmental impact levels, especially in cases when reduction in energy or CO2 is part of the green bond framework. This is due to the fact that some investors tend to look one step further, i.e. they not only review certification schemes and levels achieved, but also, the overall climate impact of their investment portfolios.

Based on our in-house research and working group discussion, diversity is reflected in the metrics used to identify eligible green projects and reporting scope. Does such diversity lead to a mismatch between investor expectations and actual criteria/reporting? When setting eligible green project criteria, every issuer has the opportunity to build its own specific framework, as long as it adheres to the Green Bond Principles, which welcome diversity. Inclusion of certification schemes could help overcome the trust barrier, with which some investors wrangle within the current nascent market. Such certification schemes may be used to signal “green” within accepted real estate industry norms, and therefore, may be applicable not only for CRE issuers but also for GGB issuers.

Next steps include tackling diversity within building activities and metrics. For example, should new projects have higher certification levels than retrofit projects?  (The topic of “additionality”, which implies outcomes that would not otherwise take place, is important here.) Only a handful of issuers make such a distinction in their framework and it will be interesting to see if such practice gets more traction. Another way to mitigate the possible trust hurdle between issuers and investors is through transparent and easily understandable reporting. Investors should have the opportunity to take a closer look at the project list, capital allocations and resulting environmental impacts. The majority of issuers provide the first two, but are still hesitant to include impact reporting. One of the reasons is the potential extra cost associated with green bond reporting. This topic will be the focus of our next GBWG session, scheduled for January 13th, 2016.

If you would like to be part of this discussion and/or become an active GRESB Green Bond Working Group member, please contact us at: +31(0)207740220 or